ADMISSIBLE DEDUCTIONS (20)

While computing the income under the head income from business certain expenses and allowances are allowed as deductions. Theses deductions may broadly be categorized into the following groups: A. Expenses incurred for the purposes of business; B. Depreciation and amortization on assets, etc; and C. Amalgamation expenses incurred by an amalgamated company. Each of the above referred categorize is discussion is disclosed in detail in the coming paragraphs. A. Expenses incurred for the purposes of business(20(1) Any expenditure incurred by a person during the tax year wholly and exclusively for the purpose of his business the income of which is taxable is allowed as deduction while computing the business income. Where the expenditure is not incurred wholly for the business, then only such proportion of it shall be allowed as deduction, which fairly relates to the business. Some of the examples of expenditures that may be allowed as deduction are given below: 1. 2. 3. 4. Cost of the goods purchased and utilized for the business. Cost of goods manufactured and sold Rent for premises used for the business. Any tax, cess, charge or rate (other than the income tax) paid in connection with the business or any of its assets. 5. Repair charges of any asset used for the business. 6. Insurance premium paid for insuri9ng the assets. 7. Any sum paid to an employee as bonus or commission for services rendered. The amount should be reasonable by considering: i. The pay of the employee; ii. The condition of the employees service; iii. The profits of the business during the year; and iv. The general practice in similar business. It is to be noted that above payments should be allowed as deduction only if these are not payable to the employee as profit or dividend. It means if it had been payable as distribution of profits then it should not be allowed as deduction. 8. Actual amount of bad debts. 9. Any expenditure incurred by an employer on any educational institution or hospital for the benefits of the employees or their dependents. 10. Any expenditure incurred on a recognized institute meant for training of industrial workers. 11. Expenditures incurred on a Pakistan for his training under an approved scheme. 12. Annual subscription paid to a registered trade organization (such as LCCA, APTMA, PSMA, etc.)

13. Expenditure on a foreign visit undertaken with a trade delegation sponsored by federal government. 14. Any expenditure incurred wholly and exclusively for the business. Note: The deduction and allowances shale be taken according to the method of accounting regularly by the taxpayer while computing his income. Where incomes are recognized on accrual basis, the expenses shall also be allowed accordingly. Animals used for business20 (1A) Where a person is using animals for the purposes of business(otherwise than as( stock-in-trade) and the animals have died or become permanently useless for business then the person shall be allowed against business income for an amount calculation below: Actual cost of the animals Less: amount realized in respect of carcasses or animals Amount to be allowed as reduction B) Depreciation and amortization on assets20 (2) A person is allowed a deduction on account of depreciation or amortization in respect of the followings: 1. Depreciable assets; 2. Intangibles with useful of more than one year; and 3. Pre-commencement expenditures C). Amalgamation expenses20 (3) An amalgamated company is allowed a deduction in respect of any expenditure connected with the amalgamation. These expenses a may be; 1. Legal expenses; 2. Financial advisory services; and 3. Other administrative cost relating to planning and implementation of amalgamation. DEDUCTION ON ACCOUNT OF FINANCIAL COSTS28 (1) A person deriving income under the head income form business shall be allowed a deduction on account of the following financial cost: 1. Any expenditure in the nature of profit on debt, it the debt has been utilized fot thr purposes of business. 2. Lease rental for a leased acquired for the business. The lease amount should have been paid to: XXX XXX XXX

i. ii. iii. iv. v.

A schedule bank; A financial bank; A Modaraba; A leasing company; or A special purpose vehicle on behalf of originator. 3. Interest on capital borrowed for business. 4. Any sum paid to a Modaraba or to a participation term certificate holder for any funds borrowed for the businesses. 5. Any payment made by a schedule bank on a profit and loss sharing account or a deposit with such bank. (This payment should have been made by way of distribution of profits in respect of such posits.) 6. Any payment made by the house building finance corporation (HBFC), the national development leasing corporation limited(NDLC) or small and medium enterprises bank(SME BANK) to state bank of Pakistan)SBP) as share in profit for investments made by SBP in HBFE,NDLC or SME bank respectively. 7. Any payment made by a Musharika to its certificate holder or to bank as share in the profits of Musharika. 8. The financial cost of securitization incurred by an originator from a special purpose vehicle (SPV) being the difference between the amount received by the originator and the amount of receivable securitized from, a SPV.

Note: Irrespective of the method of accounting adopted by the originator, where as a result of securitization any assets are transferred by him to a special purposes vehicle, it shall be treated as financing transaction28(2). Deductions not admissible (21) The following expenses or payments are not allowed as deductions while calculating the income under the head income form business: 1. Any tax, cess or rate (including income tax) levied on the profits or gains of the business. 2. Any amount of tax deducted at source form an amount received by the person. 3. Any payment made to any person without deduction tax at source (under section 149 to 158&232), if applicable. A person is required to deduct tax at source in respect of the following payments:

i. Brokerage or commission ii. Salary iii. Rent iv. Profit in debt v. Payment to non- resident vi. Payment for services; or fee 4. Any payment on which tax at source was deducted but has not been paid. 5. Any payment made by an association of persons to its partners or members on account of: i. Profit on debt; ii. Brokerage; iii. Commission; iv. Salary; or v. Any other remuneration. 6. Expenditure of a nonresident business on account of head office expenditure which exceeds the allowable limits. The allowable deduction on account of head office expenditure is calculated as follows:

7. Any expenditure incurred on entertainment except those, which are incurred: i. Abroad in connection with the business; ii. In Pakistan on entertainment of foreign or local customers and suppliers; iii. At the meeting of members, agents, directors and employees; iv. On refreshment of employees; v. At the opening of branches; and vi. On entertainment of person related to business. Notes: A) Entertainment means the provision of meals, refreshment and reasonable leisure facilities in accordance with the tradition of business and subject to over all norms and customs of business business in Pakistan. B) The board may prescribe the condition for allowing an entertainment expenses. The violation of such condition shall also render the expenses as inadmissible. 8. Any expenditure under a single account head exceeding RS.50000 in aggregate shall be inadmissible if the payment is not made through a crossed cheque or a bank draft. However, this provision shall not be applicable to, i. ii. iii. iv. Utility bills Postage Single transaction exceeding RS.10000 Payment on account of freight charges

v. vi.

Any payment credited by direct transfer to an employee bank account for reimbursement of expenses incurred on behalf of the taxpayer. Payments made to discharge and statutory obligation ( such as duties, taxes, octri, export tax, fee,cess, etc.)

Note Online transfer of payment from the business account of the payee as well as payment through credit card shall be treated as transaction through the banking channel, if such transactions are verifiable from the bank statements of the respective payer and the payee. 9. Any payment on account of salary exceeding RS.15000 per month if not made through a crossed cheque or transfer to the employs bank account. 10. Any contribution to such provident fund, pension fund, gratuity fund, superannuation fund or annuity fund which is not recognized or approved under the income tax law. 11. Any contribution to any provident or other fund, if the person has not made effective arrangements for deduction of tax source at the time of payment out of such fund. 12. Any donation to an unapproved institution. 13. Any provision against the profits of the business, e.g. provision for bad debts. 14. Any appropriation of profit such as dividends, transfer to reserves or capitalization in any way. 15. Any appropriate in the nature of fine or penalty for the violation of any law, rule or obligation. 16. Any expenditure of a capital nature (e.g. purchases of assets) 17. Any personal expenditure incurred by the person. AMOUNT SUBSEQUENTLY RECOVERED Where in any subsequent year a taxpayer has received an amount of such an expenditure or loss, which was provided or allowed as deduction against the income form business in any tax year, such amount shall be deemed as income from business in the year of receipt. ABNORMAL LOSS Where a business asset is destroyed, lost or stolen the amount representing the loss shall be charged to the profit and loss account qand shall be allowed as deduction while computing the income from business. The amount of loss is determined as below: Value of asset Less: Any amount received as salvage value, etc. if any Any compensation, indemnity or damages received under:

i. ii. iii.

An insurance policy, indemnity or other agreement A settlement or A judicial decision.

EXPENSES ON EMPLOYESS WELFARE AND TRAINING A person deriving income from business shall be allowed a deduction in respect of any expenditure incurred by him during the tax year on: i. ii. iii. iv. Any educational institution in Pakistan established for the benefit of his employees and their dependents Any hospital in Pakistan established for the benefit of his and their dependents Any institution meant for the training of industrial workers, if it recognized, aided or run by the federal government , a provincial government or a local government and Training of any Pakistani in connection with a scheme specially approved by board for this purpose.

BAD DEBTS A person shall be allowed a deduction on account of bad debts if the following conditions are satisfied: The debt was previously included in his income. In case of a financial institution it was an amount lent for the deriving taxable income The amount of debt is written off during the year and There are reasonable grounds to believe that debt cannot be recovered. Note: the amount of deduction should not be more than the actual amount written off as bad debts. The amount allowed as deduction may be less than the actual bed debts. SUBSEQUENTLY RECOVERED BAD DEBTS Where a person has been allowed a deduction on account of bad debts and in subsequent tax year he receives any amount in respect of that debt or loan, the amount so received shall be dealt with in the year in which it is received as below: 1. Where recovered amount is more than the difference between the actual bad debt and the bed debt allowed as deduction, then the excess amount shall be included in the business income for the year. 2. Where recovered amount is less than the difference the actual bad debt and the bad debt allowed as deduction, then the shortfall shall be allowed as deduction against the business income for the year.

RATES FOR DEPRECIATION ALLOWANCE S.NO 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. DESCRIPTION Building all type Furniture( including fittings) Machinery and plant ( not otherwise specified) Technical or professional books Motor vehicles( all types) Ships Computer hardware, including printer, monitor, allied items and machinery and equipments used in manufacture of I.T. products. Aircrafts, aero engines and aerial photographic apparatus. Below ground installation in mineral oil concerns. Offshore platforms and production installation in mineral oil concerns. A ramp builds to provide access to persons with disabilities not exceeding RS.250000 each. RATE OF WDV 10% 15% 15% 15% 15% 15% 30% 30% 100% 20% 100%

INTIAL ALLOWANCE FOR DEPRACIATION In addition to a normal depreciation allowance, an additional depreciation allowance (termed as initial allowance) shall be allowable4 deduction against the income form business. The followi8ng conditions apply to the initial allowance: The initial allowance is allowable on eligible depreciation asset only. The assets should be newly constructed; erected or installed (i.e. it is placed into service in Pakistan for the first times in a tax year). The initial allowance shall be admissible in respect of the later of the tax in which the assets is used first time in Pakistan or the tax year in which commercial production is commenced. The allowance shall be allowed @ 50% of thr cost of the assets as determined under the income tax ordinance, 2001. In case of a leasing company the deduction on account of initial allowance in respect of assets leased by it shall be restricted up to lease rental income only. Any unabsorbed depreciation may be carried forward for dedication in next years. Leasing company means any leasing company, investment bank, modarba, scheduled bank or development financial institution that has leased its assets to another person.

FIRST YEAR ALLOAWNCE IN ORDER TO ENCOURAGE INDUSTRIAL DEVELOPMENT IN RURAL AREAS OR UNDER DEVELOPED ARES A SPECIAL INCENTIVE scheme known as FIRSDT YEAR ALLOWANCE is introduced by the finance axt, 2008. Legal provision in this regard is as below: 1. The FYA is admissible in respect of plant, machinery and equipment. 2. These assets should be installed by an industrial undertaking set up in specified rural and under developed areas 3. The industrial undertaking should be owned and mangled by a company. 4. The assets should be put to use after July 01, 2008. 5. The rate of FYA shall be 90% of the cost of the assets and 6. Other provision of the initial allowance shall mutaits mutandis apply to FYA. Note: where in respect of an assets FYA is allowed, then such asset will not be entitled to initial allowance for depreciation.